In this article I detailed one relatively “simple” approach to using the MACD indicator to identify potentially bullish opportunities.  In this piece we will look at one to actually put those signals to use.

The Limited Risk Call Option

One possibility upon generating a bullish signal as described in the last article is to buy shares of the stock/ETF/index/etc in question.  Not a thing wrong with that.  But there is a less expensive alternative.

Figure 1 reproduces Figure 1 from the last piece showing ticker XLF.  Let’s look at the signal generated on 2/12/16.

Figure 1 – Ticker XLF (Courtesy AIQ TradingExpert)

One alternative that I like is to use the “Percent to Double” routine at www.OptionsAnalysis.com to find an inexpensive call option that has lot of upside potential.  The input screen with a few key input selections highlighted appears in Figure 1a (if it looks intimidating please note that a reusable set of criteria can be captured in a “Saved Wizard”, which appear towards the lower right of of Figure 1a.  Once a set of criteria is saved it can be reused by simply clicking on the Wizard name and clicking “Load”.)

NOTE: My own personal preference is to consider options that have at least 45 days left until expiration (as time decay can become a very negative factor as option expiration draws closer).Figure 1a – Percent to Double Inputs (Courtesy www.OptionsAnalysis.com)

Figure 1b displays the output screen.

NOTE: For my own purposes I like to see a Delta of at least 40 for the option I might consider buying (nothing “scientific” here.  It is just that the lower the Delta the further out-of-the-money the option strike price is. I prefer to buy a strike price that is not too far from the current price of the stock; hence I look for a Delta of 40 or higher).  With XLF trading at $20.49, in Figure 1b I have highlighted the 2^nd choice on the list – the April 21 call – which has a delta of 43.Figure 1b – Percent to Double Output (Courtesy www.OptionsAnalysis.com)

So a trader now has two alternatives:

*Buy 2 Apr 21 strike price XLF calls for $70 apiece ($140 total cost; 86 total deltas)

*Buy 86 shares of XLF at $20.49 apiece ($1,760 total cost, 86 total deltas)

Figure 1c displays the particulars for buying a 2-lot of the April 21 call for a total cost of $140.Figure 1c – XLF Apr 21 call (Courtesy www.OptionsAnalysis.com)

By 3/18 the shares had gained 11% and the Apr 21 call had gained 143%.  See Figure 1d.Figure 1d – XLF Apr 21 call (Courtesy www.OptionsAnalysis.com)

Summary

Obviously not every trade works out as well as this one.  Still, the key things to remember are:

*The option trade cost $140 instead of $1760

*The worst case scenario was a loss of $140.

Something to think about.

Jay Kaeppel

One danger of getting “way to into” the financial markets is that you can find yourself progressing into some needlessly complicated stuff (“Hi, my name is Jay”).  I mean it is only natural to wonder “hey, what if I divided this indicator value by that indicator value” and such.  But once you start finding yourself taking an exponential moving average of a regression line with a variable lag time, well, you can find yourself “a tad far afield.”  (Trust me on this one).  Which leads us directly to :

Jay’sTradingMaxim #44: Every once in awhile it pays to remember that the end goal is simply to make money.  The more easily the better.

So today let’s go back to a simple “basic approach.”

(See also So Who Wants to Pick a Bottom in Gold Stocks?)

The Bullish MACD Divergence

We will define an “asset” as any stock, ETF, commodity, index, etc. that can be traded on an exchange (and for my purposes, there should be a liquid market for options on that asset).

Step 1. An asset price falls to a new 20-day low and the MACD value is less than 0.  Note the MACD value on this date.

Step 2. Not less than one week but not more than 2 months later:

*Price closes below its closing level in Step 1

*The MACD indicator is above its level at the time of Step 1

Step 3. The next time the daily MACD indicator “ticks higher” a buy alert is triggered

Can it really be that simple?  The Good News is “Yes, it can.”  The Bad News is that “It isn’t always.”  To put it another way, like a lot of trading methods it can generate a surprising abundance of useful trading signals.  However, there is no guarantee that any given signal will turn out to be timely.  In other words:

This method gives you a good guideline for when to get in, but:

*It may be early at times (i.e., price will move lower still before advancing)

*It will at times be flat out wrong

*You still have to decide when to exit the bullish position.

*Call options are useful with this approach as it allows you to risk a limited amount of capital.

Examples

Figures 1 through 4 highlight some recent examples using this method.  Note that the charts show only entry points.  Exit points are “a separate topic”.Figure 1 – Ticker XLF (Courtesy AIQ TradingExpert)Figure 2 – Ticker WMT (Courtesy AIQ TradingExpert)Figure 3 – Ticker AAPL (Courtesy AIQ TradingExpert)Figure 4 – Ticker GDX (Courtesy AIQ TradingExpert)

As you can see, some signals were quite timely while others were quite early.  For the record, I started getting bullish on gold and gold stocks early in 2016 based in part on the multiple alerts that appear in Figure 4.

Jay Kaeppel

As I pointed out here, there really are alot of ways to make money in the financial markets beyond just buying stocks or mutual funds and “hoping go up”.  To wit:

2/11: A Blow off Buying Panic in GLD and TLT? – On 2/11 the stock market opened sharply lower and gold and bonds spiked higher.  This action smacked of a blow-off top for both GLD and TLT (and as it turned out was the low day of the move down for stocks).Figure 1 – GLD and TLT “spike” in what appeared to be characteristic of a “blow off” top (Courtesy AIQ TradingExpert)

(See also 9 Charts That Explain (Almost) All the Anger)

2/16: Is This the Greatest Buying Opportunity Ever in Crude Oil?

and

2/16: One Way to Play Crude Oil Volatility

The first article highlighted a sign that the sell off in crude had finally reached an “overdone” level and the second one highlighted one way to play the situation using optionsFigure 2 – Selling in Crude finally reaches “oversold” (Courtesy AIQ TradingExpert)

Figure 2a – Modified Butterfly Spread using USO Options (Courtesy www.OptionsAnalysis.com)

 2/29: 3 Reasons to be Bullish on 2016 (and 2 Reasons to be Scared as Hell) – Highlighted several signals that suggested that continued bullish action might be in the offing.Figure 3 – SPX follows through to the upside (Courtesy AIQ TradingExpert)

3/1: It’s Soon or Never for Soybeans – Highlighted a potential buying opportunity in Soybeans Figure 4 – A Potential buying opportunity in Soybeans (Courtesy: www.Barchart.com)

3/11: Time for a Breather in Gold Stocks? – The jury is certainly still out on this one but the article highlighted a bearish divergence for by successive higher highs in price accompanied by lower lows in the 3-day RSI.Figure 5 – A potential short-term high in gold stocks (Courtesy AIQ TradingExpert)

 Jay Kaeppel

All credit for this information goes to ZeroHedge.com.

(See also There Really Are a Lot of Ways to Make Money)

If you want to understand why people are flocking to “non-traditional” candidates like Trump and Sanders, it all comes pretty clear with a persusal of the charts displayed in Figures 1 below.

(click to enlarge)Figure 1 – The State of “Things” (Courtesy: ZeroHedge.com)

I will leave you to draw your own conclusion.

My Two Cents: I will leave my own political leanings out of this.  Because, quite frankly they don’t really matter.  I’m just another guy with an opinion.  What does matter is the fact that – OK, I guess this is just an opinion as well, but one that is at least relevant to the topic – the reason that people are angry all across the fruited plain is that our politicians have failed us completely and utterly.  Now if you are a Democrat you will say it is all Bush’s fault or the fault of the Republican Congress.  Likewise if you are a Republican you will say it is all Obama’s fault.  And so on and so forth.

Sorry, but this looks to me like a bi-partisan across the board FUBAR (a WWII reference which you can look up yourself on the internet).

Everybody focuses on the Presidency, but our system was never actually intended for the President (any President) to “run everything” (I believe the correct word for that is “dictatorship”).  But I think the bigger problem lies elsewhere.  Consider this: Congressional approval runs somewhere around 10% – and yet about 90% of incumbents who run for re-election win.  Hello, anybody?  Yes, I know, you gotta vote “D” because all of the “R”’s are evil or you gotta vote “R” because all the “D”’s are traitors.  And therein lies the creation of the heart of the problem – i.e., the “career politician”.

I think it is time for one of two things, either:

A) Term limits – let me throw 12 years out there; 2 terms in Senate or 6 terms in Congress. And then “Thank you for your service, now get the hell out of here and go look for a real job like the rest of us schlubs.”

Or

B) We the people need to primary and/or vote some incumbents out of office once in awhile.  We do have that ability you know.  Maybe not a bad idea to put a little “fear” into the career politicians spending all of our grandkids yet to be earned money.

Hey, it’s a start.

Finally, in keeping with the current tone of the political climate out there these days, if anything that I have said here offends you, let me just say “$%^&*!”

There, I feel better….

Jay Kaeppel

I am typically not one to blow my own horn.  It has nothing to do with humility really.  It’s more the fact that typically when it dawns on me that things have been “going pretty well of late”, Murphy (who hates me) applies his %^&*# Law and, well, I’m sure you can guess what happens next.  So I should know better but, to review:

1/11: Fading Natural Gas with UNG Options – Highlighted seasonal tendency for Natural Gas to decline mid-Jan into mid-Feb.Figure 1 – Ticker UNG fades (Courtesy AIQ TradingExpert)

1/13: Catching the Falling SLV Safe – Detailed a limited risk bottom picking approach to using options on SLV.Figure 2 – Ticker SLV bottoms out (Courtesy AIQ TradingExpert)

1/19: Blood in the Energy Streets – Highlighted the fact that absolutely nobody anywhere had absolutely anything good to say about energy related assets – a classic contrarian signal.Figure 3 – XL and USO (Courtesy AIQ TradingExpert)

1/26: Seasonality in Housing Stocks – Highlighted a potentially bullish seasonal trend in housing stocks.  After a wash out decline things have improved dramatically.Figure 4 – Ticker FSHOX (Courtesy AIQ TradingExpert)

1/28: A Two-Fund Portfolio for the Next Three Months – Highlighted the seasonal tendency for energy and retail to rally in the Feb-Apr timeframe.Figure 5 – Ticker FSHOX (Courtesy AIQ TradingExpert)

2/9: Turning a Short-Term SLV Trade into a Long-Term SLV Trade – Followed up on 1/13 article by adjusting existing option position to lock in a profit and extend the opportunity another 11 months.Figure 6 – Adjusted SLV option trade (Courtesy www.OptionsAnalysis.com)

(See also Jay’s Trading Maxim’s (Part 1))

Jay Kaeppel

Incredibly, gold stocks (using Fidelity Select Gold – ticker FSAGX – as a proxy) are up +53.6% since 1/19/16.  But a simple technical pattern suggests that it may be time for a “breather” (please notice that I did not say “resumption of a major downtrend”).

(See also An Update on the SPY Directional Condor Spread)

Momentum is important to us “technical analysis types”.  And while gold stocks have continued to tick higher, momentum “under the radar” appears to be waning.  See Figure 1.Figure 1 – FSAGX; 4 successive new highs in price marked by successively lower 3-day RSI readings (Courtesy AIQ TradingExpert)

This divergence is apparent in any number of other momentum indicators (MACD, TRIX, Coppock, etc.  Does this imply that gold stocks are about to plunge to the downside?  Not necessarily.  It is mostly a warning sign  that a pullback may be the offing.  And this is important given the size and nature of the recent advance.

If we get a standard issue 40-60% correction of the recent run-up that would result in a not inconsequential 14% to 21% decline in gold stocks – a move you may not want to sit through fully invested on the long side, and one that may be playable from the bearish side if you are a nimble trader.

Since this blog offers only “ideas” and not “recommendations” you will have to figure out exactly what – if anything – to do with this tidbit yourself.  But the bottom line is that a little bit of caution appears to be in order.

Jay Kaeppel

On 3/1/16 I wrote this article suggesting the possibility of a buying opportunity in soybeans.  Hey, guess what, if you write enough of these types of articles, every once in awhile you get one right!  Figure 1 displays the action for May soybeans since the initial article.Figure 1 – May Soybeans bounce off a of multiple bottom (Courtesy: www.Barchart.com)

(See also An Update on Crude Oil Volatility Play)

So in theory had a trader bought May soybean futures at 861 with a stop-loss at 852.5, the initial risk (barring a gap as detailed in the original article) would have been -$425.

Since that time May beans have rallied from 861 to 888.  At $50 a point that equates to an open profit of +$1,350.  The obvious question of course is “What Now?”

As always, there are various possibilities:

As you can see in Figure 2 there is some meaningful resistance between 890 and 891.  If price stalls there I would consider taking some profits.

If holding a 1-lot: I would probably take the money and run if price hits 890 and fails to break through to the upside.

If holding more than a 1-lot: I would probably sell half of my position if price hits 890 and fails to break through to the upside.  For the other half, I would consider a trailing stop (initially just below 875).  This approach allows a trader to:

A) Take a decent profit (roughly $1,400 per contract) on half of his or her position

B) Lock in a profit on the remaining position (roughly $675 per contract if the position is sold at 874.5 trailing stop)

C) Hold on to half of the position just in case soybeans breakout above 890 and keep going.Figure 2 – May Soybeans position management price points (Courtesy: www.Barchart.com)

Boy, this “picking a bottom” thing sure is fun, er, well, when it works.

Jay Kaeppel

There are a lot of ways to make money in the financial markets.  Unfortunately, too many investors and traders are unaware of the fact that many of these ways involve methods other than buying stocks or mutual funds and hoping they “go up”.

(See also An Update on Crude Oil Volatility Play)

In this article dated 2/5/16, I highlighted an example of one way to play volatility using options on SPY.  The beauty of this example trade is that it can make money under a variety of scenarios.  In this piece we will take another look at what actions might be considered now that there are only 10 days left until March expiration.

The Original Trade

The particulars of the original trade appear in Figure 1 (click to enlarge).Figure 1 – SPY Directional Condor (Courtesy www.OptionsAnalysis.com)

There are a lot of ways for this trade to make money:

*If SPY soars there is unlimited profit potential to the upside

*If SPY is anywhere between 182 and 204 at March expiration the initial credit of $402 would be our profit

*If volatility falls prior to March expiration early profit-taking can be considered.

*The downside breakeven price is 181.

The Update

As I write, SPY has rallied is now trading at $198.40 and the trade is showing an open profit of $296 with 10 days left until expiration as shown in Figures 2 and 3.Figure 2 – Updated SPY Directional Condor (Courtesy www.OptionsAnalysis.com)

Figure 3 – Updated SPY Directional Condor (Courtesy www.OptionsAnalysis.com)

Where to from here?

One of the keys to trading success – particularly in options – is knowing when to exit a position.  With this trade the “hope” is to simply ride it out until expiration and hopefully earn the full initial credit of $402.

However, the real question at the moment is “what do we not want to have happen?”  A closer look at Figure 3 reveals that this trade can actually turn into a loss if SPY rises to between 205 and 208.

So what can be done to:

A) Give us a chance to earn the full $402 credit and;

B) Not let this trade turn into a loss

Answer:

The truth is that there are many potential ways to answer the question.  But for example’s sake, let’s just look at one approach as highlighted in Figure 4.

Action #1: Close trade IF SPY rises above $202 a share.

Action #2: Close trade IF SPY falls and open profit falls to $225.

If neither of these things happen then simply wait for expiration and collect a profit.

Figure 4 (Courtesy www.OptionsAnalysis.com)

Summary

As always the trades I write about are for example only and not trade recommendations.  In addition, the real purpose of these examples is to help traders understand that there are many ways to trade and make money that do not involve buying stocks or mutual funds and “hoping” they rise in price.

Jay Kaeppel

Well I am not going to say that I “called the bottom” in crude oil.  Because the reality is that I simply do not possess that ability.  That being said, I am pretty good at:

*Spotting trends

*Recognizing wildly “overdone” buying or selling.

(See also It’s Soon or Never for Soybeans)

In this article on 2/16 I highlighted a chart that I saw in this article.  The implication of the chart was that crude oil – at least when compared to gold – was, well, wildly overdone to the downside.  So on the same day I wrote this article.  Today’s piece is an update of the example trade highlighted in that article.

USO Modified Butterfly

I noted at the time that implied option volatility for ticker USO was at an extremely high level and highlighted an example trade using a strategy referred to as a “modified butterfly spread”.

The original trade on 2/16 appears in Figures 1 and 2Figure 1 – USO July Modified put butterfly (Courtesy www.OptionsAnalysis.com)

Figure 2 – USO July Modified put butterfly risk curves (Courtesy www.OptionsAnalysis.com)

Since that time:

*USO has rise from $8.31 to $10.11 (See Figure 3)

*The implied for USO options has declined – but still may have a lot further to fall (See Figure 4)

Figure 3 – USO bounces (Courtesy AIQ TradingExpert)Figure 4 – USO implied volatility off of highs (Courtesy www.OptionsAnalysis.com)

So the trade now stands with an open profit of $464 as shown in Figures 5 and 6.Figure 5  – Updated USO July Modified put butterfly (Courtesy www.OptionsAnalysis.com)

Figure 6  – Updated USO July Modified put butterfly (Courtesy www.OptionsAnalysis.com)

If price were to remain unchanged through July expiration the profit would increase from $464 to $692.  However, that is still 130 calendar days away.

Choices:

Sit and wait – if price does not collapse once again and/or implied volatility drifts lower then the trade’s profit will increase over time.

Close the position now – given the volatile nature of crude oil and the fact that this could be nothing more than a rally in a bear market, it might make sense to “take the money and run”.

Adjust – One possibility would be to close half the position.  The Good News: If USO dropped back below its low of $7.67 the position could still be exited with a profit (probably in the $200 range).  The Bad News: the profit potential drops from $692 to $578 (current open profit = $464), so you would be sitting with a trade for another 130 days for an additional profit potential of $114.

I would be itching to take the money and run at this point.  However, an alternative would be to hold on as long as price is stable and IV is declining – but consider closing out the position at the first sign of trouble for USO.

Jay Kaeppel

Below is a link to an article written by Gary Gordon of Pacific Park Financial, Inc.

The article headline mentions Trump and Sanders but I suggest that you read this piece from an apolitical point of view.  Also forget all of the “economic news” that you may have heard of late.  Everything political or “news” related is spun to favor whatever point of view the person providing the information – or the person consuming the information – prefers.  In other words, if you’re a Democrat everything that is wrong is the fault of Bush/GOP Congress/etc., and if you’re a Republican everything that is wrong is the fault of Obama/Reid/Clinton/etc.

Blah, blah, blah.

All biases, preferences, viewpoints, etc. aside, the 5 charts in the article are based on hard data and say a lot about where we are right now.  I suggest you take a look.

5 Economic Charts Help Investors Understand Trump And Sanders by Gary Gordon

Jay Kaeppel